Penn Law: Legal Scholarship Repository
Penn Law: Legal Scholarship Repository
Faculty Scholarship at Penn Law 2017
Partial Takings
Partial Takings
Abraham Bell
University of San Diego
Gideon Parchomovsky
University of Pennsylvania Carey Law School
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Bell, Abraham and Parchomovsky, Gideon, "Partial Takings" (2017). Faculty Scholarship at Penn Law. 1736.
https://scholarship.law.upenn.edu/faculty_scholarship/1736
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COLUMBIA LAW REVIEW
VOL. 117 DECEMBER 2017 NO. 8
2043
ARTICLES
PARTIAL TAKINGS
Abraham Bell* & Gideon Parchomovsky**
Partial takings allow the government to expropriate the parts of an asset it needs, leaving the owner the remainder. Both vital and common, partial takings present unique challenges to the standard rules of eminent domain. Partial takings may result in the creation of suboptimal, and even unusable, parcels. Additionally, partial takings create assessment problems that do not arise when parcels are taken as a whole. Finally, partial takings engender opportunities for inefficient strategic behavior on the part of the government after the partial taking has been carried out. Current jurisprudence fails to resolve these prob-lems and can even exacerbate them.
This Article offers an innovative mechanism that remediates the shortcomings of extant partial takings doctrines. It proposes that the government give owners whose property is partially taken the power to force the government to purchase the remainder of the lot at fair market value. Exercise of this power by the private owner would lead to the reunification of the land in its pretaking form while transferring title to the entire parcel to a new single owner—namely the government.
*. Professor, Bar-Ilan University Faculty of Law and University of San Diego School of Law.
**. Robert G. Fuller Jr. Professor of Law, University of Pennsylvania School of Law, and Professor, Bar-Ilan University Faculty of Law. This Article greatly benefited from comments and criticisms by participants in the faculty workshop of the College of Law and Business (Ramat Gan) and sessions of the 2016 Private Law Consortium Seminar at the University of Oslo, the 2016 Annual Conference of the American Law and Economics Association at Harvard University, and the 2016 Property Works in Progress Conference at Boston University; from comments and criticisms from Michael Abramowicz, Tally Amir, Shyamkrishna Balganesh, Uri Benoliel, Bill Bratton, Yun-Chien Chang, Lee Anne Fennell, Sylvia Ferreri, Evan Fox-Decent, Jonah Gelbach, Yehonathan Givati, Andrew Gold, John Goldberg, Michele Graziadei, Dave Hoffman, Daniel Kelly, Jon Klick, Michael Knoll, Shelly Kreiczer Levy, Daphna Lewinsohn-Zamir, Adi Libson, Thomas Miceli, Jonathan Nash, Wendell Pritchett, Erik Røsæg, Chris Sanchirico, Reed Shuldiner, Ram Singh, Lionel Smith, Stephen Smith, Dov Solomon, Endre Stavang, Geir Stenseth, Gila Stopler, Andrew Verstein, Katrina Wyman, Eyal Zamir, and participants at the 2016 Annual Conference of the American Law and Economics Association at Harvard University, the University of Pennsylvania Faculty Retreat, and the annual gathering of the Private Law Consortium at McGill University. For excellent research assistance we thank Ben Meltzer, Ananth Padmanabhan, and Amal Sethi.
Implementation of our proposal would yield important benefits, including allowing for the preservation of current parcel configuration, lowering the cost of the adjudication process as a whole, and reducing the ability of the government to behave strategically. Additionally, our proposal would create opportunities for more efficient planning and land use by the government as the government would be free to reparcel, develop, and resell the parcels sold to it.
INTRODUCTION ...2045
I. THE LANDSCAPE OF PARTIAL TAKINGS ...2048
A. Partial and Other Takings ...2048
B. Special Doctrines of Partial Takings ...2054
1. Offsets ...2055
2. Severance ...2060
C. The Problem with Partial Takings ...2062
1. The Artificial Incentive for Partial Takings ...2062
2. Compensation Problems ...2063
3. Problematic Asset Configurations ...2065
4. Strategic Misbehavior ...2066
II. ADDING OPTIONS TO PARTIAL TAKINGS ...2067
A. The Use of Options in Property Law ...2068
B. An Option-Based Mechanism for Addressing Partial Takings ...2072
C. The Advantages of the Proposed Model ...2074
1. Improved Asset Configuration ...2074
2. More Accurate Compensation ...2074
3. Incentivizing Improved Government Decisionmaking ...2075
4. Reduced Administrative Costs ...2076
III. POTENTIAL OBJECTIONS ...2078
A. De Minimis Takings ...2080
B. Government Land Holdings ...2081
IV. EXTENSIONS ...2083
A. Self-Assessment ...2083
B. Partial Chattel Takings ...2086
C. Partial Regulatory Takings ...2088
INTRODUCTION
Partial or incomplete takings allow the government to expropriate those particular parts of an asset that it needs, leaving the owner to retain the remainder.1 The evidence shows that partial takings are ubiquitous.
At least in some jurisdictions, partial takings are more common than total takings.2 In fact, in some cases, the law of the jurisdiction pushes
authorities to engage in partial takings rather than complete takings.3
Partial takings are routinely used when the government engages in pub-lic construction projects, particularly in the area of transportation.4 They
are also common in cases in which the government needs to erect protective barriers against flooding on beachfront properties and riparian lots.5
At first blush, one might assume that partial takings are more efficient and fairer than total takings, as they take no more property than necessary. This first impression is incorrect, however. Partial takings impose two substantial costs. The first cost is administrative. Because in many cases there is no market for the particular slice of the asset seized by the government, determining the value of the partial taking (and, therefore, the compensation to be paid) is quite difficult and expensive.6
The second cost relates to the value of the parcel itself. While the partial taking is motivated by a government need for the particular slice seized, there may be little private use for what remains of the parcel. A partial taking may render the remainder practically or legally unfit for ordinary use. The remaining land may fail to comply with size or setback restrictions or otherwise be no longer fit for use. Likewise, the remainder may simply depreciate in value in light of changes effected by the government project. Consequently, the partial taking might prove to be less efficient than keeping the asset together, even if the government were to underutilize some parts of the total asset.7
1. See generally Julius L. Sackman, 4A Nichols on Eminent Domain § 14.01 (3d ed. 2017) [hereinafter 4A Nichols on Eminent Domain].
2. Ronit Levine-Schnur & Gideon Parchomovsky, Is the Government Fiscally Blind? An Empirical Examination of the Effect of the Compensation Requirement on Eminent-Domain Exercises, 45 J. Legal Stud. 437, 450 (2016) (highlighting a study of takings in which only 42% of the observed cases were total takings).
3. See, e.g., Preseault v. United States, 100 F.3d 1525, 1534–37 (Fed. Cir. 1996) (holding that Vermont, as a matter of state law, was required to proceed with a partial taking to acquire “only that which it needed” to achieve the state’s goals).
4. See Xiaoxia Xiong & Kara Kockelman, Cost of Right-of-Way Acquisition: Recognizing the Impact of Condemnation via a Switching Regression Model, 20 J. Infrastructure Sys. 04014021-1, 0414021-2 (2014) (summarizing a study showing that in excess of 90% of Texas Department of Transportation takings were partial takings).
5. See infra notes 19–24 and accompanying text. 6. See infra Part I.
This Article proposes a new approach to partial takings that addresses both aforementioned costs at once. Whenever the government elects to engage in a partial taking, the private property owner should be given a put option8 that will entitle her to sell the remainder of the lot to
the government. The exercise price of the put option should be a per-centage of the fair market value of the asset as a whole, with both the percentage and the market value of the whole determined at the time of the partial taking. As a consequence of the exercise of the option, the title to the parcel would be unified in the hands of the government. And, as the new owner of the title to the entire parcel, the government would have full discretion as to how to use or dispose of the parcel in the future.
Under present law, the power of eminent domain grants the gov-ernment what is functionally a call option9 over all private property. The
government’s call option is exercisable at fair market value and is subject to the largely toothless public use requirement in the Constitution.10
Extant law recognizes no such option in private parties to buy or sell land. The introduction of our mechanism would give private property owners a limited put option, exercisable at fair market value in a small set of cases: those in which the government decided to use its call option to take only part of the land of an individual owner.
As an illustration of how our proposed system would work, consider the following example. Assume that the government wants to expand the street adjacent to Abby’s land. The government does not need all of Abby’s land to widen the street; it therefore takes 68% of Abby’s parcel by eminent domain. Assume, further, that the fair market value of Abby’s parcel is $100,000 and that, prima facie, all parts of the land are of equal value. Under current law, the baseline for compensating Abby will be the amount of $68,000 for the part taken.11 In addition, Abby can demand
additional compensation for the “severance harm” she suffered and for
8. A put option empowers the option holder to sell a good, entitlement, or future commodity to a certain counterparty at a preset price or a price to be decided in the future. See Ian Ayres, Protecting Property with Puts, 32 Val. U. L. Rev., 793, 796 (1998) [hereinafter Ayres, Protecting Property]; Put Option, Investopedia, http://www.investopedia.com/terms/p/ putoption.asp [http://perma.cc/5ZQA-XZSD] (last visited Sept. 19, 2017); see also infra section II.A.
9. A call option allows the option holder to purchase an asset, entitlement, or future commodity from a certain counterparty at a preagreed price or at a price to be determined in the future. See Ayres, Protecting Property, supra note 8, at 796; Call Option, Investopedia, http://www.investopedia.com/terms/c/calloption.asp [http://perma.cc/SPY3-UZD7] (last visited Sept. 28, 2017); see also infra section II.A.
10. See Abraham Bell & Gideon Parchomovsky, The Uselessness of Public Use, 106 Colum. L. Rev. 1412, 1423 (2006) [hereinafter Bell & Parchomovsky, The Uselessness of Public Use] (describing the libertarian criticism that Kelo v. City of New London, 545 U.S. 469 (2005), failed to narrow the Supreme Court’s public use doctrine).
11. In our example, we presumed that the taken land was not only 68% of the whole in size but also 68% of the whole in value. This presumption is unlikely to bear true in reality.
the diminution in value of the remainder.12 The government may seek to
offset compensation with the value of certain benefits the taking bestows upon Abby’s remaining property.13 Note, however, that the severance and
diminution harms are very difficult to substantiate and that proving them imposes considerable costs on Abby—in both money and time. Under our proposal, Abby would have the option of sidestepping the procedure of proving severance and diminution harms by simply forcing the government to take her lot in its entirety and pay the market value of her entire lot (i.e., $100,000).14
It bears emphasis that we do not propose forcing the government to retain title to the remainder it would receive via exercise of put or call options. On the contrary, the government would acquire the prerogatives of the owner and thus retain complete liberty in deciding what to do with the land it receives. The government could either retain the entire parcel, if it preferred, or reparcel the land in any way it wanted and sell parts on the open market.
Our proposal presents four advantages over the current legal regime. First, it prevents the creation of parcels that are suboptimally configured for use. Under our proposed regime, were a partial taking to threaten to leave the remainder unfit for use, the owner (or the government) would exercise her put (or its call) option to stop this result from occurring. Second, and relatedly, our proposal creates a readily available mecha-nism for reuniting the title to the lot as a whole in the hands of a single owner, thereby preempting the creation of negative externalities that tend to arise in cases of split ownership. Concretely, our mechanism
12. See infra section I.B.2. 13. See infra section I.B.1.
14. An integral component of our proposal is the determination of the ratio of the value of the part of the land taken to the value of the land as a whole. Knowing the value ratio is essential to setting the strike price of the call and put options (i.e., the amount the government would have to pay Abby in the event the option were exercised). Indeed, in many senses, the value ratio is the strike price. In our example, if the ratio were 68%, the strike price would be 32% of the value of the lot as a whole—$32,000. If the option were exercised at a later time, the strike price would have to be adjusted by the relevant measure of inflation, which would be the price index for realty.
We suggest two alternative ways of establishing the strike price. The easiest way would be to carry forward current doctrines for establishing the value of partial assets. Courts would use these doctrines to determine the value of the taken land, which, when compared with the value of the asset as a whole, would yield the value ratio. An alternative means for establishing the ratio would be to allow either the government or the aggrieved owner to set the ratio or even to set the ratio arbitrarily at the percentage in size, rather than value, of the land taken as compared to the plot as a whole. Size is easier to measure, and, of course, self-assessment may lead to the revelation of private information. This alternative would obviously create some interesting strategic pressures to overstate or understate value (in the case of self-assessment) or otherwise to take advantage of the gap between size and actual value. However, availability of the put and call options would correct any misincentives created by the gap between stated and actual value ratios. See infra sections II.A–.B.
ensures that over time the government does not increase or change the nature of its use of the parts taken in a way that harms the remainder. Third, our mechanism creates an incentive for the government to engage in more efficient planning and land-development policies. In many eminent domain projects, the government takes title to multiple parcels and can, therefore, unlock synergies across parcels that owners of individual lots cannot possibly unlock or even envision. Fourth, and finally, at least in some variants, our proposal creates significant cost sav-ings, relative to the existing rule, by obviating the need to appraise the value of the part that remains in the hands of the private owner after the taking. Indeed, our proposal can sometimes suffice with appraising the value of the parcel as a whole, which should be a much easier task.
While our proposal is self-contained, it has obvious implications for a number of other issues in the world of takings. Accordingly, after pre-senting our proposal, we briefly discuss several potential extensions. We demonstrate how a mechanism of self-assessment can be incorporated into our basic model and analyze how it would change the incentives of the parties. Next, we examine how our basic model for partial takings of land can be used in the contexts of partial takings of chattel. Finally, we look at whether our model can be used to address issues of partial regu-latory takings and conclude that it cannot.
Structurally, the Article unfolds in four parts. In Part I, we position the phenomenon of partial takings within the larger framework of eminent domain and discuss the rationales that have been proffered to support the practice. Additionally, we enumerate the drawbacks that attend partial takings and the costs they impose on society. In Part II, we present our reform proposal. Drawing on the rich literature on the use of options within law, we detail the option mechanism with which we seek to replace the current legal regime. In Part III, we consider several potential objections to our model. Specifically, we look at whether the model should apply to very small takings, and we introduce a de minimis limitation into our basic model. Additionally, we consider the possible impact on state holdings of land and the potential constitutional limitations on our model. Finally, in Part IV, we contemplate and evaluate several extensions of our model by offering an alternative self-assessment valuation mechanism for determining the price of the options, extending our model to partial chattel takings, and assessing the applicability of our model to partial regulatory takings. A short conclusion ensues.
I.THE LANDSCAPE OF PARTIAL TAKINGS
A. Partial and Other Takings
The government typically takes property by eminent domain when it needs the property for a purpose other than that to which it is currently
put to use.15 It will not generally take farmland to establish a government
farm but rather to build a road. The physical configuration that fits the old use of the property often does not match the new use of the property. A narrow strip of land suffices for a highway; the entire farm is rarely needed.16
For this reason, partial takings are ubiquitous. It is reasonable to estimate that there are at least as many partial takings as total takings in some jurisdictions.17 We suspect that most government projects do not
require seizures of lots in their entirety and that the government has no need to take an entire parcel of land when a part will do. Construction or expansion of roads, trails, railroad tracks, or other forms of infrastruc-ture almost always relies on partial takings. As an illustration, consider the case of Loretto v. Teleprompter Manhattan CATV Corp., in which the Supreme Court ruled that the placement of cable on private buildings in New York City, together with a small box on the roof, amounted to a partial taking that required the payment of compensation to the building owners.18
Partial takings are common in yet another category of cases: beach replenishment.19 Consider the aftermath of Hurricane Sandy. The storm
had destroyed coastal dunes, laying bare the littoral oceanfront proper-ties.20 To protect these properties, as well as the safety of the public at
15. See, e.g., Kelo, 545 U.S. at 472–75 (discussing the constitutionality of government
use of eminent domain to transform condemned residential property into mixed-use development); Haw. Hous. Auth. v. Midkiff, 467 U.S. 229, 242 (1984) (holding that use of eminent domain to correct market failures in real property was a proper application of public use under the Fifth Amendment); Berman v. Parker, 348 U.S. 26, 35 (1954) (holding that the government interest of addressing urban blight was a proper application of public use under the Fifth Amendment); United States v. Miller, 317 U.S. 369, 370 (1943) (noting that condemnation of a strip of private land for public railroad use was necessary); Julius L. Sackman, 2A Nichols on Eminent Domain § 6.01 (3d ed. 2017) [hereinafter 2A Nichols on Eminent Domain].
16. See Julius L. Sackman, 1A Nichols on Eminent Domain § 3.02(2)(b) (3d ed. 2017) [hereinafter 1A Nichols on Eminent Domain] (detailing the government’s authority to condemn private property for various public uses, including highways); 2A Nichols on Eminent Domain, supra note 15, § 7.06 (highlighting the taking of private property for a public highway as the oldest of many valid public uses); see also Ellen Frankel Paul, Property Rights and Eminent Domain 7–14 (1987) (describing the concept of eminent domain); Thomas J. Miceli & Kathleen Segerson, The Economics of Eminent Domain: Private Property, Public Use, and Just Domain, 3 Found. & Trends Microeconomics 275, 280–82 (2007) (providing an overview of case law relating to eminent domain).
17. See, e.g., Levine-Schnur & Parchomovsky, supra note 2, at 450 (highlighting that 58% of the 3,140 takings in Tel Aviv, Israel, between 1990 and 2014 were partial takings).
18. 458 U.S. 419, 425–41 (1982).
19. See James G. Titus, Rising Seas, Coastal Erosion, and the Takings Clause: How to Save Wetlands and Beaches Without Hurting Property Owners, 57 Md. L. Rev. 1279, 1299– 301, 1346 (1998).
20. Jenny Anderson, Rebuilding the Coastline, but at What Cost?, N.Y. Times (May 18, 2013), http://www.nytimes.com/2013/05/19/nyregion/rebuilding-the-coastline-but-at-what-cost.html (on file with the Columbia Law Review); St. Petersburg Coastal & Marine Sci. Ctr.,
large and the coastal systems, the state governments of New Jersey21 and
New York22 committed to reconstituting the coastal dunes, partly on
pub-lic property but mostly on private land. The measures involved multiple partial takings that attracted the wrath of certain private property owners and triggered litigation.23
Another category of cases that has occasioned partial takings consists of the expansion of riverbeds or navigational routes.24 Such changes in
the layout of rivers invariably involve reconfiguration of the boundaries of riparian lots.While such adjustments typically involve multiple lots, it is possible that, in some cases, only one lot will be affected.
In all these cases, the government needs only a portion of existing parcels of land for its project. A partial taking, therefore, gives the gov-ernment what it needs for its project while saving valuable resources. This is because the law of eminent domain requires the government to pay only for what it takes.25 Hence, the government will often allow a
par-tial taking to suffice for financial reasons. In some cases, state law even requires the state to proceed with a partial taking when that is all that is necessary to achieve the state’s aim.26
Hurricane Sandy Response—Storm Impacts and Vulnerability of Coastal Beaches, U.S. Geological Survey, http://coastal.er.usgs.gov/sandy-storm-impact-vulnerability/research/ coastal-impacts.html [http://perma.cc/28Z2-ZQ7W] (last modified Dec. 5, 2016) (describing the damage from Hurricane Sandy).
21. See Leslie Garisto Pfaff, Sea Change: Post-Sandy Rebuilding, N.J. Monthly (Dec. 11, 2012), http://njmonthly.com/articles/jersey-shore/sea-change-post-sandy-rebuilding [http://perma.cc/M3UX-BR7R]; Elise Young, New Jersey Shore Towns Challenge Sand Dunes Plan as Storms Gather, Ins. J. (May 5, 2016), http://www.insurancejournal.com/news/east/ 2016/05/05/407618.htm [http://perma.cc/8BSK-JQYB].
22. See Lisa W. Foderaro, Fire Island Residents to Lose Their Homes to Make Way for a Dune, N.Y. Times (July 17, 2015), http://www.nytimes.com/2015/07/19/nyregion/some-houses-on-fire-island-to-be-torn-down-to-make-way-for-new-dune.html (on file with the Columbia
Law Review); De Blasio Administration Releases Progress Report on Sandy Recovery and
Resiliency, NYC.gov (Oct. 22, 2015) http://www1.nyc.gov/office-of-the-mayor/news/749-15/de-blasio-administration-releases-progress-report-sandy-recovery-resiliency [http://perma.cc/JX6B-39Y9].
23. Wayne Parry, Beachfront Owners Challenge Sand Dunes Plan, Courier-Post (Jan. 21, 2016), http://www.courierpostonline.com/story/news/local/south-jersey/2016/01/21/beach-property-lawsuit/79116298 [http://perma.cc/TE4W-SJS4]; see also Matthew Hromadka, Comment, The Price of Protection: Compensation for Partial Takings Along the Coast, 30 Touro L. Rev. 861, 876–77 (2014); Louis M. Russo, Note, From Railroads to Sand Dunes: An Examination of the Offsetting Doctrine in Partial Takings, 83 Fordham L. Rev. 1539, 1541 (2014).
24. See, e.g., Hromadka, supra note 23, at 875–76 (discussing United States v. Fort Smith River Dev. Corp., 349 F.2d 522 (8th Cir. 1965)). See generally Richard S. Harnsberger, Eminent Domain and Water Law, 48 Neb. L. Rev. 325 (1969) (examining just compensation as it relates to “water development and allocation”).
25. See Abraham Bell & Gideon Parchomovsky, Takings Reassessed, 87 Va. L. Rev. 277, 279 (2001) [hereinafter Bell & Parchomovsky, Takings Reassessed].
26. A statute of this kind was the source of the decision to take only an easement for a railroad track, which led to the litigation of Preseault v. United States, 100 F.3d 1525 (Fed. Cir. 1996).
It is worth noting another important aspect of partial takings: Partial takings cases paradigmatically implicate the core justifications for the existence of a power of eminent domain. Accepted lore justifies the power of eminent domain on the grounds that it is necessary to overcome the twin problems of high transaction costs and holdouts that would otherwise undermine the government’s ability to carry out valuable social projects.27 The takings literature suggests that high
transaction costs are positively correlated with the number of lots affected.28 Specifically, the more private lots a project involves, the more
rights the government will need to clear, and the higher the cost of the project will rise. The holdout problem, by contrast, arises whenever the government must gain access to a particular lot.29 In such cases, in a world
without eminent domain, the relevant private owner could try to extract the entire surplus arising from the project before consenting to the transaction.30 The holdout problem arises when the government has no
reasonable substitutes to a particular parcel and must appropriate that parcel alone.31
The twin problems of high transaction costs and holdouts are endemic to projects that rely on partial takings. Almost inevitably, partial takings rely on particular parcels, making the partial taking highly vul-nerable to holdouts. At the same time, while partial takings may not involve a large number of parcels, the transaction costs associated with a partial taking can be quite high. This is due to the particular problems partial takings raise—particularly in establishing the value of the partial lots taken—that we explore in depth later in this Part.32 In order to take
property by eminent domain, the state must pay “just compensation” to the owner whose property is taken.33 Figuring out the amount that
27. Jonathan Klick & Gideon Parchomovsky, The Value of the Right to Exclude: An Empirical Assessment, 165 U. Pa. L. Rev. 917, 937 (2017).
28. See Thomas J. Miceli, The Economic Approach to Law 216–17 (2004); Lloyd Cohen, Holdouts and Free Riders, 20 J. Legal Stud. 351, 356 (1991); Daniel B. Kelly, Acquiring Land Through Eminent Domain: Justifications, Limitations, and Alternatives, in Research Handbook on the Economics of Property Law 343, 345–50 (Kenneth Ayotte & Henry E. Smith eds., 2011); Thomas J. Miceli & Kathleen Segerson, Land Assembly and the Holdout Problem Under Sequential Bargaining, 14 Am. L. & Econ. Rev. 372, 374–75 (2012).
29. The need for a particular lot and the need for many lots are not mutually exclusive. For instance, the collection of many lots to build a road may make particular lots necessary in order to complete the road.
30. See, e.g., Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089, 1106–07 (1972); Thomas J. Miceli & Kathleen Segersen, Holdups and Holdouts: What Do They Have in Common?, 117 Econ. Letters 330, 332 (2012).
31. Of course, the parcel may be needed in conjunction with other parcels to enable the government use.
32. See infra section I.C.
33. The just compensation requirement appears not only in the U.S. Constitution, which guarantees “private property [shall not] be taken for public use, without just
stitutes “just compensation” is a perennial difficulty.34 Calculating
com-pensation for partial takings is far more difficult35 and, concomitantly,
more expensive.
The choice of whether to pursue a partial taking is thus a difficult one for the state. Partial takings may reduce the amount of direct com-pensation paid by the government for property, but at the same time, they create additional costs that must be borne, in part, by the state.
A further complication is added by the fact that the state’s decision to pursue a partial taking does not take full account of the social costs engendered by such takings.
Full and accurate compensation for takings is indispensable to the proper functioning of the government’s power of eminent domain.36
Accurate compensation is necessary for three distinct reasons. First, accurate compensation ensures fairness for aggrieved owners by ensuring that individual property owners are not forced to bear costs that ought rightly to be borne by society as a whole.37 Second, accurate
compen-sation ensures that government decisionmakers do not suffer from “fiscal illusion”—the illusion that social costs matter only when they find expression in government budgets.38 Third, and finally, accurate
compensation,” U.S. Const. amend. V, but also in state constitutions. Julius L. Sackman, 1 Nichols on Eminent Domain § 1.3 (3d ed. 2017). Indeed, the compensation requirement is understood around the world to be a necessary companion to the power of eminent domain. Simon Keith et al., Food Agric. Org. of the United Nations, Compulsory Acquisition of Land and Compensation 11–15 (2008), ftp://ftp.fao.org/docrep/fao/011/ i0506e/i0506e00.pdf (on file with the Columbia Law Review); see also 1A Nichols on Eminent Domain, supra note 16, § 1C.02.
34. Patrick J. Rohan & Melvin A. Reskin, 9 Nichols on Eminent Domain § G31.04 (3d ed. 2017) [hereinafter 9 Nichols on Eminent Domain]; Katrina Miriam Wyman, The Measure of Just Compensation, 41 U.C. Davis L. Rev. 239, 252–61 (2007); see also infra note 40.
35. Julius L. Sackman, 3 Nichols on Eminent Domain § 8A.02 (3d ed. 2017) [hereinafter 3 Nichols on Eminent Domain].
36. See Bell & Parchomovsky, The Uselessness of Public Use, supra note 10, at 1416–17. 37. See, e.g., Armstrong v. United States, 364 U.S. 40, 49 (1960) (articulating this rationale).
38. There is an ongoing debate about the degree to which fiscal illusion actually occurs in the real world. In support of the theory that fiscal illusion impacts government decisionmaking, see, e.g., David A. Dana & Thomas W. Merrill, Property: Takings 41–46 (2002); Thomas J. Miceli, Economics of the Law: Torts, Contracts, Property, Litigation 141 (1997); Richard A. Posner, Economic Analysis of Law 56, 73–74 (2007); Lawrence Blume & Daniel L. Rubinfeld, Compensation for Takings: An Economic Analysis, 72 Calif. L. Rev. 569, 620–28 (1984); Louis Kaplow, An Economic Analysis of Legal Transitions, 99 Harv. L. Rev. 509, 567–70 (1986). But see Steven Shavell, Foundations of Economic Analysis of Law 130 (2004) (questioning the fiscal illusion theory as a justification for the compensation requirement); Bethany R. Berger, The Illusion of Fiscal Illusion in Regulatory Takings, 66 Am. U. L. Rev. 1, 7–16 (2016) (arguing the fiscal illusion theory incorrectly assumes government officials are driven by maximizing fiscal returns); Yun-Chien Chang, Empire Building and Fiscal Illusion? An Empirical Study of Government Official Behaviors in Takings, 6 J. Empirical Legal Stud. 541, 544 (2009) (finding that in Taiwan, local
pensation reduces the possibility (and therefore the incentives) for gov-ernment actors to utilize their taking power for corrupt purposes.39
When compensation does not accurately measure the costs imposed by takings, the takings power can be misused or abused. This is no less true when the taking is a partial one.
Unaccounted-for costs and benefits are endemic to all takings and, in particular, to partial takings. Many scholars have argued that standard compensation formulas for all exercises of eminent domain fail to take account of some kinds of subjective value enjoyed by owners.40
Addition-ally, government benefits that accompany takings are generally not given expression in compensation formulas.41 Finally, not all “takings” of
property are compensable. A complicated set of judicially crafted formulas distinguish between, on the one hand, ordinary government actions that take valuable property rights and attributes without the need for compensation and, on the other hand, those that go “too far” and become “regulatory takings” for which compensation must be paid.42
“Partial regulatory takings,” in particular, do not trigger a compensation requirement, unless, like other regulatory actions, they go “too far.”43
governments are sensitive to political costs and benefits when assessing land value); Daryl J. Levinson, Making Government Pay: Markets, Politics, and the Allocation of Constitutional Costs, 67 U. Chi. L. Rev. 345, 377 (2000) (challenging the fiscal illusion theory as a justification for takings compensation).
39. Abraham Bell & Gideon Parchomovsky, The Hidden Function of Takings Compensation, 96 Va. L. Rev. 1673, 1692–704 (2010).
40. E.g., Abraham Bell & Gideon Parchomovsky, Taking Compensation Private, 59 Stan. L. Rev. 871, 872–73 (2007) [hereinafter Bell & Parchomovsky, Taking Compensation Private]; James Geoffrey Durham, Efficient Just Compensation as a Limit on Eminent Domain, 69 Minn. L. Rev. 1277, 1292 (1985); John Fee, Eminent Domain and the Sanctity of Home, 81 Notre Dame L. Rev. 783, 790 (2006); James J. Kelly, Jr., “We Shall Not Be Moved”: Urban Communities, Eminent Domain and the Socioeconomics of Just Compensation, 80 St. John’s L. Rev. 923, 940 (2006); James E. Krier & Christopher Serkin, Public Ruses, 2004 Mich. St. L. Rev. 859, 866; Thomas W. Merrill, The Economics of Public Use, 72 Cornell L. Rev. 61, 83 (1986); see also Laura H. Burney, Just Compensation and the Condemnation of Future Interests: Empirical Evidence of the Failure of Fair Market Value, 1989 B.Y.U. L. Rev. 789, 793–94.
41. See infra section I.B.1.
42. There is a vast literature on regulatory takings, including Steven J. Eagle, Regulatory Takings (5th ed. 2012); Richard A. Epstein, Takings: Private Property and the Power of Eminent Domain (1985) [hereinafter Epstein, Takings: Private Property]; William A. Fischel, Regulatory Takings: Law, Economics, and Politics (1995); Lawrence Blume, Daniel L. Rubinfeld & Perry Shapiro, The Taking of Land: When Should Compensation Be Paid?, 99 Q.J. Econ. 71 (1984); Thomas J. Miceli & Kathleen Segerson, Regulatory Takings: When Should Compensation Be Paid?, 23 J. Legal Stud. 749 (1994); Frank I. Michelman, Property, Utility, and Fairness: Comments on the Ethical Foundations of “Just Compensation” Law, 80 Harv. L. Rev. 1165 (1967); Joseph L. Sax, Takings, Private Property and Public Rights, 81 Yale L.J. 149 (1971).
43. John D. Echeverria, Partial Regulatory Takings Live, but . . . , in Taking Sides on Takings Issues: The Impact of Tahoe-Sierra 67, 67 (Thomas E. Roberts ed., 2002); Richard A. Epstein, Lucas v. South Carolina Coastal Council: A Tangled Web of Expectations, 45 Stan. L. Rev. 1369, 1377–78 (1993) [hereinafter Epstein, Lucas v. South Carolina] (stating that
These valuation problems associated with ordinary takings are even more severe in the case of partial takings. Partial takings involve the seizure of partial assets. This means that the seized property may have no market in which value can be measured. In addition, the seizure of one partial asset leaves behind a different partial asset. The effect of the seizure on the partial asset left behind must also find expression in valuation formulae.
In sum, partial takings are both extremely popular and extremely problematic. Partial takings are supported by the justifications support-ing ordinary taksupport-ings and troubled by the difficulties attendsupport-ing them. Yet, partial takings also have unique aspects that make them both particularly useful and unusually problematic. Ideally, the legal treatment of partial takings would ameliorate these problems. Unfortunately, the law’s treat-ment of partial takings seems more likely to exacerbate them. It is to this troubling feature of the law of partial takings that we now turn.
B. Special Doctrines of Partial Takings
This section explores the judicial treatment of partial takings. Courts have fashioned many special doctrines to deal with compensation for partially taken parcels of land. The doctrines, as this section will demon-strate, deal with only some of the challenges partial takings pose. In some ways, the doctrines may be said to worsen the already extant challenges.
As a preliminary matter, it is important to understand the conun-drums posed by compensating for partial takings. In general, takings compensation aims to give the owner of the taken property money in the value of the taken property.44 Prima facie, if the state takes one-third of
Blackacre, it should give the owner one-third of the value of Blackacre. But in reality, matters are not so simple. Blackacre may not be of con-sistent quality; part may be rocky, and the rest flat. Moreover, taking one-third of Blackacre affects the value of the remaining two-one-thirds. It may no longer be possible to use Blackacre in the same way as before—the lot, for instance, may no longer be large enough to grow certain crops. And new uses of Blackacre may now be possible—for example, the new road created in part from the taken property may enable a new factory to get products to the market cost efficiently. The relationship between the partial taking and the value of what remains of Blackacre is a complex
partial takings, while virtually total in form, will remain uncompensated under the Court’s current approach).
44. See Bell & Parchomovsky, Taking Compensation Private, supra note 40, at 872– 73; see also Patrick J. Rohan & Melvin A. Reskin, 8A Nichols on Eminent Domain § G18.02 (3d ed. 2017) [hereinafter 8A Nichols on Eminent Domain]; 4A Nichols on Eminent Domain, supra note 1, § 14.01.
one. This relationship is the source of a variety of special doctrines for adjusting compensation awards in cases of partial takings.45
1. Offsets. — One of the most litigated questions of partial takings compensation is the “offset.” In most cases, an “offset” reduces compen-sation for partial takings.46
To understand offsets, we must recall that all takings—not just par-tial takings—produce multiple effects, some positive, some negative.47
For instance, when the state uses the power of eminent domain to take land to build a road, the landowners lose the assets taken by the state, but the remaining owners gain the value of easier access to their land. Indeed, given the constitutional requirement that takings be justified by a “public use,”48 it is near impossible to think of a taking without an
accompanying benefit to at least one person.49 In most cases, the law
treats the costs and benefits entirely separately. The losses the owners suffer as a result of the government’s takings are compensated. The benefits owners enjoy as a result of the government’s givings are over-looked.50
In the case of partial takings, however, matters are different. Under both state and federal law of takings compensation, when deciding on the compensation to award owners suffering a partial taking, courts take into account both costs and benefits.51 In the language of the law,
com-pensation for the taking is “offset” by the value of the benefit realized by the owner. The U.S. Supreme Court has ruled that such offsets are constitutional and do not run afoul of the constitutional requirement of “just compensation” for takings.52
While it has a great deal of intuitive appeal, a doctrine of offsetting compensation by the value of benefits actually creates three different sets of difficulties. First, the doctrine is difficult to apply. It is difficult enough to measure land value;53 it is much tougher when the effects of
govern-ment projects must be disentangled from all the other factors affecting
45. See generally 4A Nichols on Eminent Domain, supra note 1, § 14.03 (exploring the special valuation issues associated with partial takings).
46. 3 Nichols on Eminent Domain, supra note 35, § 8A.02; 4A Nichols on Eminent Domain, supra note 1, § 14.03.
47. Bell & Parchomovsky, Takings Reassessed, supra note 25, at 290. 48. U.S. Const. amend. V.
49. See Abraham Bell & Gideon Parchomovsky, Givings, 111 Yale L.J. 547, 565 (2001) [hereinafter Bell & Parchomovsky, Givings] (“Thus, any taking must confer some benefit on the public.”).
50. Id. at 549.
51. 3 Nichols on Eminent Domain, supra note 35, § 8A.02; 4A Nichols on Eminent Domain, supra note 1, § 14.03.
52. Bauman v. Ross, 167 U.S. 548, 584 (1897). In some states, the benefits may offset only severance damages but not the compensation for the property taken. See, e.g., Done Holding Co. v. State, 534 N.Y.S.2d 406 (App. Div. 1988); State v. Meyer, 403 S.W.2d 366, 374 (Tex. 1966); City of Richardson v. Smith, 494 S.W.2d 933, 940 n.4 (Tex. Civ. App. 1973).
land value. All states eliminate from the offset valuation effects that are not attributable to government action, and the version of the doctrine most jurisdictions use involves an even more difficult exercise of line-drawing between government-created effects that are legally important and those that are not. Second, the doctrine does not apply solely to par-tial takings but also to cases in which a landowner owns multiple parcels. This means that application of the doctrine depends on the identity of the landowner, rather than simply the nature of the asset.54 Third, and
finally, by offsetting benefits only for partial taking compensation but not for other takings or government actions, the doctrine actually creates a perverse incentive. It encourages the state to prefer partial takings to reduce the amount of compensation to be paid. Let us examine each of these in turn.
The doctrine of offsets is not as simple as it sounds.55 At least in
some states, the compensation award is not adjusted for all benefits real-ized by the owner. Courts draw a distinction between “special benefits”— benefits that are “direct and peculiar to the particular property”56—and
“general benefits,” which accrue to the many properties in the area.57 In
most states and at the federal level, courts reduce the compensation award (or offset it, in the preferred terminology) by the value of special benefits realized by the owner of the taken property.58 The offset
doctrine thus benefits the government in partial takings cases by allowing it to pay less compensation than it would have to pay in ordinary takings. However, the state reduces costs only to the extent of special, but not general, benefits created by the government project.
While it is easy to grasp the conceptual difference between special and general benefits, it is much harder to identify them in practice. Consider, for instance, the case of Defnet Land & Investment Co. v. State ex
54. For those who support incorporating broader concerns of distributive justice into eminent domain compensation awards, this can be seen as a feature, rather than a bug. See, e.g., Hanoch Dagan, Takings and Distributive Justice, 85 Va. L. Rev. 741, 746 (1999). However, it remains difficult to explain why the distributive justice concerns should enter into the picture only in the case of partial takings. Cf. Daphna Lewinsohn-Zamir, In Defense of Redistribution Through Private Law, 91 Minn. L. Rev. 326, 329 (2006) (defending more broadly the use of private law to effect redistribution); Glynn S. Lunney, Jr., Takings, Efficiency, and Distributive Justice: A Response to Professor Dagan, 99 Mich. L. Rev. 157, 158 (2000) (arguing against Dagan’s proposal).
55. For a summary of the different state and federal approaches to offsets, see generally 3 Nichols on Eminent Domain, supra note 35, § 8A.03.
56. United States v. Trout, 386 F.2d 216, 221–22 (5th Cir. 1967) (internal quotation marks omitted) (quoting United States v. 2,477.79 Acres of Land, 259 F.2d 23, 28 (5th Cir. 1958)).
57. Richardson v. Big Indian Creek Watershed Conservancy Dist., 151 N.W.2d 283, 286 (Neb. 1967) (“[G]eneral benefits are those which arise from the fulfillment of the public object which justified the taking . . . .” (internal quotation marks omitted) (quoting Backer v. City of Sidney, 89 N.W.2d 592, 592 (Neb. 1958))).
rel. Herman.59 The State of Arizona had decided to widen a highway, and
it therefore seized by eminent domain roughly thirteen acres of land from a tract of 120.75 acres owned by the aggrieved landowner.60 The
state agreed to pay compensation for the taken land, as well as severance damages, but it sought to offset the reward by applying the value of “special benefits” the land enjoyed due to the highway expansion.61
Specifically, the state argued that the remaining land was more valuable because the highway expansion brought an interchange in close proxim-ity to the affected land.62 The landowner challenged this argument on
the grounds that proximity to highway interchanges should never be considered a “special” benefit.63 The landowner also noted the oddities
of the particular case—that before receiving the “benefit” of the widened interstate highway, the land enjoyed direct access to a much longer stretch of the unimproved highway, while the new interchange itself was not located on the taken land but, rather, nearby on other taken land.64
The court rejected the landowner’s argument, ruling that proximity to highway interchanges might or might not constitute special benefits, depending on the circumstances, including such matters as the amount of traffic on the highway and the amount of distance from the inter-changes.65 The rule, in other words, is that benefits must be examined ad
hoc, and there are no firm guidelines for distinguishing the general from the special benefits.
With the distinction between special and general benefits boiling down to a fact-intensive but legally vague judicial determination, it is unsurprising that disagreements between state and landowner are frequent, and litigation common. The need to distinguish between the effects of specific and general benefits also complicates the appraisal process, since appraisers must discern not only the degree to which a property’s price has been affected by a taking but also the degree to which other properties’ prices have been affected by the same taking.
A small number of jurisdictions have set aside the distinction between special and general benefits. For instance, in a controversial recent decision,66 Borough of Harvey Cedars v. Karan, the New Jersey
Supreme Court eliminated the long-standing distinction between general 59. 480 P.2d 1013 (Ariz. Ct. App. 1971). 60. Id. at 1014–15. 61. Id. at 1015. 62. Id. 63. Id. 64. Id. at 1019. 65. Id. at 1019–20.
66. See William J. Ward, NJ Supreme Court Overturns Karan, Changes Rules on Partial Takings, N.J. Eminent Domain Blog (July 8, 2013), http://www.njeminentdomain.com/ state-of-new-jersey-nj-supreme-court-overturns-karan-changes-rules-on-partial-takings.html [http://perma.cc/SS4W-3QC7] (describing the decision as opening “a virtual Pandora’s box of issues for trial judges”).
and special benefits in New Jersey law and expanded the offset doctrine to cover all benefits engendered by any takings project.67 The case
involved the restoration of sand dunes.68 The Karans owned a
single-family beachfront home in Harvey Cedars, New Jersey.69 As part of its
efforts to protect the beaches from erosion by rebuilding sand dunes, the Borough of Harvey Cedars took a perpetual easement over roughly one-quarter of the Karans’ property.70 The state sought to pay compensation
only for the actual reduction in value to the Karans’ property; this meant that the compensation award would be offset by the value of all benefits that accrued to the Karans’ property, instead of just the “special benefits.” The New Jersey Supreme Court reversed the lower court’s deci-sion in favor of the Karans and sided with the state, ordering the lower measure of compensation.71 It remains to be seen whether New Jersey’s
approach will be adopted elsewhere in the United States.
The New Jersey approach can potentially make application of the offset rule much easier. Applying this approach, one measures the value of a partially taken property before the taking and after it.72 The
differ-ence between the two values is the amount that has to be paid in compensation. If the remainder of the land has actually increased in value after the taking, no compensation need be paid at all.73 Of course,
even this approach may pose logistical problems. It’s doubtful that the affected realty was actually sold immediately before and after the taking, making it more difficult to gauge the exact value of the property. Markets for real estate never involve perfect substitutes, so measuring price is a complex process.74 In addition, one has to account for other factors that
67. 70 A.3d 524, 526–27 (N.J. 2013). 68. Id. at 527. 69. Id. at 528. 70. Id. 71. Id. at 526–27.
72. To be sure, this is not as easy as it sounds. The land market is not like the stock market. Thousands or even millions of identical stocks are bought and sold nearly continuously, such that it is possible to measure the price of a share at any given time with a high degree of precision. Land markets are much thinner—as there are many fewer buyers and sellers—and the products being sold are never perfect substitutes. Cf. William Larson, Bureau of Econ. Analysis, New Estimates of Value of Land of the United States 2 (Apr. 3, 2015) (unpublished manuscript), http://www.bea.gov/papers/pdf/new-estimates-of-value-of-land-of-the-united-states-larson.pdf [http://perma.cc/8727-U858] (discussing the difficulty of measuring the value of land and proposing a model for evaluating the value of land).
73. But see Brittany Harrison, Note, The Compensation Conundrum in Partial Takings Cases and the Consequences of Borough of Harvey Cedars, 2015 Cardozo L. Rev. de novo 31, 51–56, http://www.cardozolawreview.com/content/denovo/HARRISON.36.denovo.pdf [http://perma.cc/9FAG-DNTZ] (arguing the New Jersey ruling is equally compatible with different valuation approaches).
74. See Peter Chinloy, Real Estate: Investment and Financial Strategy 25–47 (1988) (describing various approaches to appraising property, such as the cost, market, income-capitalization, and hedonic approaches); Riël Franzsen & William J. McCluskey, Value-Based Approaches to Property Taxation, in A Primer on Property Tax: Administration and
affect the price of the property, as reflected in broader price movements in the real estate market.75
Problems in measuring offsets are compounded by the peculiar definition of “partial takings” for purposes of the offset doctrine. In most jurisdictions, a taking is considered “partial” for purposes of the offset doctrine so long as a portion of the owner’s land holdings is taken, even if all the taken land consists of whole parcels.76 Consider, for instance, a
state decision to take a single parcel of land—Blackacre—in its entirety to create a park. The park is sufficiently valuable that the four abutting parcels of land—Whiteacre, Greyacre, Blueacre, and Greenacre—will all double in value. For simplicity’s sake, let us assume that all five parcels are of equal value, and all are worth $100,000. If each of the five parcels were owned by a different person, the state would have to pay $100,000 in compensation to the owner of Blackacre to seize the land for the park. However, if the owner of Blackacre also owned another parcel, say Greyacre, the offset doctrine would view Blackacre–Greyacre as a single parcel that had been partially taken. Thus, under the offset doctrine, there would be no compensation: The $100,000 loss of Blackacre would be offset by the $100,000 gain in value of Greyacre.
As our hypothetical taking of Blackacre illustrates, the offset doctrine leads to two disturbing anomalies. First, the amount of compen-sation that must be paid for takings depends on the identity of the aggrieved party, rather than on the property being taken. The government’s taking of the same land, which is otherwise the same in all particulars, in some cases will require a large compensation payment and in others a small payment (or none at all) based on the identity of the owner. Second, the ability of the government to recapture the value of its givings depends on it taking property. If the government creates the park on land it already owns, it cannot utilize the offset doctrine, but if it seizes the land to create the park, the offset doctrine may be used to sub-sidize the seizure. This means that the government best preserves its reservoir of land holdings by pairing its takings of land with projects that
Policy 41, 54–56 (William J. McCluskey, Gary C. Cornia & Lawrence C. Walters, eds., 2013) (describing the complexities of valuation in general and specific difficulties arising from the fact that “no two parcels are exactly alike”).
75. See Chinloy, supra note 74, at 27 (“Some problems with appraisal are posed by inflation and its presence or absence . . . .”).
76. A similar rule is applied to partial regulatory takings. A regulation that deprives some parcels of all their value, but leaves value in other parcels of the same owner, cannot be considered a regulation that completely eliminates the value of a parcel, automatically triggering a finding of a regulatory taking. Rather, such a regulation must be considered as depriving all the parcels together of some of their value, thus requiring an indeterminate and fact-intensive determination of whether the regulation went “too far” and became a regulatory taking. See infra notes 183–196. See generally Palazzolo v. Rhode Island, 533 U.S. 606, 630–32 (2001) (noting the persistent difficulty of the denominator problem but rejecting the petitioner’s assertion of total deprivation to a smaller parcel because the issue was not presented in the petition for certiorari).
create positive externalities for landholders. For government planners with an eye on the budget, a project with such positive externalities is an excellent opportunity to take land on the cheap, as long as the govern-ment remembers to take the land from holders of multiple parcels.
This leads us to the third and most serious problem with offsets: No matter how perfectly the offsets are measured, they distort the incentives of state officials making decisions about takings. Indeed, in some sense, the more accurately the offset doctrine measures the effects of the tak-ing, the worse the distortion of incentives.
Ordinarily, when the government takes property by eminent domain, it owes compensation for the full value of the property taken, irrespective of any benefits created.77 But if the offset rule applies, the amount of
compensation that must be paid drops drastically. Suddenly, the govern-ment may force the private citizen to pay a charge for the “giving”—the benefit it bestows upon the citizen.78 This means that the government will
pay less compensation and perhaps avoid having to pay at all. When the offset rule applies, takings are dramatically cheaper for the government. All things being equal, the government should always prefer takings in which the offset rule applies to those in which it does not.
The offset rule may lead the government to configure projects in such a way as to take advantage of the ability to reduce compensation by offsetting gains. This creates an incentive for the government to prefer, all things being equal, to seize parts of two parcels rather than one com-plete parcel. Likewise, the doctrine incentivizes the government to take parcels from owners of multiple parcels, rather than to take all the landholdings of a single owner.
2. Severance. — A second unique doctrine associated with partial tak-ings is the severance damage rule.79 Under this rule, when an asset is
partially taken, the compensation is calculated in two steps. First, one calculates the value of the partial asset taken. Second, one measures the change in value of the partial asset that remains with the owner—the “severance damage.” One then combines the two values to get the total amount of compensation.80
The severance rule is not generally intended to be applied together with an offset rule. Rather, it is used as a different approach to
77. 3 Nichols on Eminent Domain, supra note 35, § 8A.02(1) (noting “just compensation” has generally been interpreted to mean “fair and adequate monetary compensation for land actually taken, regardless of any benefits to the remainder”); see also Noel F. Delporte, Note, Benefit as Legal Compensation for the Taking of Property Under Eminent Domain, 16 St. Louis L. Rev. 313, 317–23 (1931) (discussing state constitutional provisions that forbid using benefits to offset compensation for land takings).
78. See Fischel, supra note 42, at 80–84; Bell & Parchomovsky, Givings, supra note 49, at 555–56, 596–97.
79. See 26 Am. Jur. 2d Eminent Domain § 281 (2014). 80. 3 Nichols on Eminent Domain, supra note 35, § 8A.02(1).
ing damages. To understand this, consider the ordinary use of the offset rule. The offset rule is used when the primary measure of damages is the difference between the value of the whole asset before the taking and the partially remaining property after the taking.81 In such cases, the offset
rule clarifies that that difference in value is not the final word on compensation due; rather, the loss in value occasioned by the taking must be “offset” by certain benefits. By contrast, when the severance rule is used, the primary measure of damages is the value of that portion of the asset which is taken. Ideally, measuring damages by the value of taken land plus severance damages should yield the same result as measuring the value of the remaining land discounted by general benefits. The severance rule simply assures that proper account is taken of the impact of the taking on the remaining property. As the Fourth Circuit Court of Appeals noted, the different approaches (offset or severance) ultimately seek to measure the same loss, but do so in different ways. Consequently, setting compensation at the difference between property value before and after taking (of the untaken parts of the asset) and then adding extra compensation for “severance” can result in the payment of double compensation.82 Said the court,
[A]s the government argues, if th[e] [“before and after method of valuation”] is properly employed when there is a partial taking, severance damages should not be allowed. This is so because if the fair market value of the property after the taking is subtracted from its fair market value before the taking, pre-sumably the fair market value after the taking would reflect any diminution in value by reason of the taking so that a separate allowance for severance damages is unnecessary in order for the landowner to recover just compensation.83
Theoretically, the severance rule should allow courts to avoid the pitfalls of the offset rule and calculate damages more precisely. Unfor-tunately, reality is more complicated.84 Severance damages are almost
impossible to calculate. Measuring severance damages requires courts to undertake the same task that frustrates them in measuring offsets: They must figure out to what degree changes in asset value are attributable to “severance” as opposed to other phenomena,85 such as changes in the
81. See supra section I.B.1; see also 1 Lewis Orgel, Valuation Under the Law of Eminent Domain §§ 48–51 (James C. Bonbright ed., 2d ed. 1953) (comparing the three formulas courts have used to measure “just compensation” for partial takings).
82. See United States v. 2.33 Acres of Land, 704 F.2d 728, 728 (4th Cir. 1983). 83. Id. at 730 (citing United States v. 38.60 Acres of Land, 625 F.2d 196, 201 (8th Cir. 1980)).
84. See Ashley Mas, Note, Eminent Domain Law and “Just” Compensation for Diminution of Access, 36 Cardozo L. Rev. 369, 374–75 & n.31 (2014) (listing the exceptions to the principle that all consequential damage to remaining parcels is compensable).
85. See 4A Nichols on Eminent Domain, supra note 1, § 14.03 (addressing limitations on the compensability of damage to remaining property).
market or the general effects of a government action. Because the mar-kets for partial assets are often thin, or even nonexistent, there is little empirical basis on which courts can make such determinations. Instead courts must try to infer the relative financial impact of several causes by various indirect measurements.
Additionally, even if courts feel confident enough to make a decision about the economic impact of a severance, they must have a firm grasp of the other pieces of the compensation puzzle. They must be able to measure the value of the taken asset in such a way as to ensure full com-pensation but not double comcom-pensation.86
It is little wonder, therefore, that courts often choose the offset method instead.
C. The Problem with Partial Takings
While partial takings are both ubiquitous and necessary, they also raise unique economic problems. Specifically, partial takings lead to three characteristic difficulties. First, the division of a parcel between state and owner creates a situation that may be prone to strategic misbe-havior, such as extortion by the state. Second, in dividing parcels between the state and the prior owner, partial takings may create new assets (post-taking parcels) that are suboptimally configured. For instance, while a partial taking may enable a road, the partial taking may come at the price of making an entire farm unusable. Third, because partial takings involve dividing up existing parcels of land, they create new assets that may have no clear market. This complicates efforts to value the asset taken. Obviously, all three of these difficulties are related to one another.
The special doctrines discussed above do not fully address these three problems, and in some ways, they even exacerbate them. Indeed, the offset doctrine in particular creates a fourth problem with partial tak-ings: Special doctrines incentivize the state to prefer partial takings over complete takings.87 Indeed, the state may choose inefficient partial
takings over efficient complete takings or nonaction.
In this section we address each of these problems, in reverse order. We begin with the artificial and undesirable incentive to engage in partial takings created by the special doctrines.
1. The Artificial Incentive for Partial Takings. — The first problem that arises in the context of partial takings is directly related to the offset rule. As explained above, the offset rule allows the government to adjust downward compensation awards by taking account of the positive effects of exercises of eminent domain.88 The offset rule, however, applies only to partial
takings or takings of a portion of an owner’s larger set of holdings. When
86. See id. § 14.02(3)(b)(ii).
87. See supra notes 77–79 and accompanying text. 88. See supra section I.B.1.
land holdings are taken in their entirety, no offset is possible. This, of course, creates an incentive for the government to prefer partial takings to total takings when both methods can achieve the government’s goals.89
As an illustration, consider the following example. Imagine that the construction of a new highway exit increases the value of ten identical contiguous commercial lots by 200% each on account of the increase in the volume of traffic. Assume that the government can construct the new exit either by taking four of the lots in their entirety or by taking 40% of each of the ten lots. Assume, further, that the first option—taking four lots in their entirety—is more desirable from a planning standpoint; seiz-ing the lots in their entirety would allow for a more compact exit, with lower maintenance costs and superior safety. In the absence of the offset rule, the government would clearly prefer to take the four entire lots. This option would lead to better results at the same cost (or perhaps even a lower cost, since the government would bear the administrative cost of only four takings, rather than ten). Yet, under the current compensation rules, the government has a strong financial incentive to choose the second, inferior option. While the inferior option would require the gov-ernment to bear the cost of prosecuting ten eminent domain proceedings, in each case, thanks to the offset rule, the government would avoid paying any compensation. The offset rule, in other words, would render the acquisition of private property by eminent domain essentially free, so long as the government remembered to use partial takings.
In the extreme case, partial takings allow the state to take fee simple ownership in land without paying compensation and without falling afoul of the constitutional requirement to pay “just compensation” for takings. But even in the less extreme cases in which the state does have to pay compensation for a partial taking, the offset rule makes it likely that the state will pay less than it would for similar assets taken by whole-parcel takings.
Naturally, the ability to seize ownership for no compensation or for very little compensation distorts the government’s decisions on takings. Simply put, when given the opportunity to take a lot and pay a little, there are few who will resist to the opportunity to take.90
2. Compensation Problems. — Of course, the purpose of the offset rule is not to distort government incentives. Rather, the offset rule (like the severance rule) helps courts properly calculate compensation for partial takings.91
89. See supra section I.B.
90. One does not need to hold to extreme versions of fiscal illusion to recognize that budgetary considerations potentially impact government decisionmaking in some fashion. See supra note 38.
91. See 4A Nichols on Eminent Domain, supra note 1, § 14.02[1] (noting that the severance and offset rules “are merely tools to be used by the court or the jury in determining the sometimes elusive question of what constitutes full or just compensation
As we noted, compensation for eminent domain is already a difficult task even when the taking is of a complete parcel. Compensation, as cal-culated by standard doctrines, ignores a number of important harms and benefits.92 The offset doctrine partially alleviates the failure to take
account of givings in ordinary exercises of eminent domain, but it does so at the cost of distorting government incentives.93 Additionally, when
the offset doctrine discounts general benefits, it forces courts to engage in a fact-intensive inquiry into the character of different benefits remainder properties enjoy.94
Partial takings do not alleviate the ordinary difficulties in calculating compensation; they exacerbate them. This is because partial takings necessarily divide assets into new configurations. The old configurations may have had thick or thin markets, but the new configuration will almost certainly have a thin market or none at all. Consider, for example, the taking of a diagonal strip of land for a road, in such a manner as to create two remainder parcels that are roughly triangular. Though the new triangular parcels might have been created previously, they were not, probably because there was little demand for them. While the demand for such parcels might emerge at some time in the future, there is little likelihood that such demand will emerge precisely at the time they are created by the partial taking.95
in the case of partial taking”); see also Village of South Orange v. Alden Corp., 365 A.2d 469, 472 (N.J. 1976) (providing the formulas for the offset and severance methods and noting that either may be used in New Jersey); Orgel, supra note 81, §§ 48–51 (noting the three formulas courts use to determine partial takings compensation).
92. See Coniston Corp. v. Vilage of Hoffman Estates, 844 F.2d 461, 464 (7th Cir. 1988) (“Compensation in the constitutional sense is . . . not full compensation, for market value is not the value that every owner of property attaches to his property but merely the value that the marginal owner attaches to his property.”); see also Bell & Parchomovsky, Taking Compensation Private, supra note 40, at 885–90; Durham, supra note 40, at 1278– 79; Lee Anne Fennell, Taking Eminent Domain Apart, 2004 Mich. St. L. Rev. 957, 962–67 [hereinafter Fennell, Taking Eminent Domain Apart]; Krier & Serkin, supra note 40, at 866; Merrill, supra note 40, at 82–85. In practice, “Many owners are ‘intramarginal,’ meaning that because of relocation costs, sentimental attachments, or the special suitability of the property for their particular (perhaps idiosyncratic) needs, they value their property at more than its market value.” Coniston, 844 F.2d at 472.
93. See, e.g., Russo, supra note 23, at 1552 (noting that as nineteenth-century railroad companies “invested with the power of eminent domain [and] took advantage of the ability to offset, some began to compensate landowners entirely in benefits,” with “[o]ne scholar report[ing] that railroad takings in Illinois frequently resulted in an award of $1” (footnote omitted)); cf. 3 Nichols on Eminent Domain, supra note 35, § 8A.03(1) (noting that offset rules vary depending “on whether benefits may setoff damages to the remainder or to the property taken and whether special or general benefits may be considered for setoff”).
94. Russo, supra note 23, at 1552. (“The early nineteenth century opinions made no effort to classify benefits as general or special, and the New York high court went so far as to suggest that a landowner could be entirely compensated with benefits.”).
95. Studies show that parcels with regular boundaries are more valuable than those with irregular boundaries. See, e.g., Gary D. Libecap & Dean Lueck, The Demarcation of
